Outlook for Funds in October: Balancing Internal and External Constraints
As the end of the quarter approached, the central bank took steps to increase its efforts in the open market and address liquidity needs ahead of the holiday season. This stable funding level comes after a period of tight liquidity in September, which has led the market to speculate about the extent of liquidity pressure in October.
Data indicates that the central bank’s open market reverse repurchase operations achieved a net investment of 1.157 billion yuan in the week leading up to the holiday. However, on October 7, 825 billion yuan of reverse repos will expire, raising concerns about the funding situation after the holiday.
Tianfeng Securities believes that as long as the pressure of RMB exchange rate fluctuations remains significant, the market will continue to experience pressure on funding interest rates. However, the central bank has downplayed the issue of idle funds arbitrage, and superimposed institutions have also shown convergence in their behavior. Therefore, while the funding aspect may still face constraints from internal and external balance, the overall situation is not expected to further tighten. The agency predicts that R001 may range from 1.5% to 2% in the near future, and the DR007 may range from 1.8% to 2.2%.
Essence Securities predicts a potential funding gap of about 290 billion to 430 billion yuan in October. However, they note that the central bank has indicated its intention to actively protect funds, demonstrated through actions such as reducing the reserve requirement ratio in September and the continuous large-scale investment in open market reverse repos. With the prospect of the Federal Reserve raising interest rates becoming clearer in October, the pressure on the RMB exchange rate may ease, allowing funds to gradually return to normal levels.
CITIC Securities believes there will be a certain liquidity gap in October, specifically in terms of government bonds and fiscal revenue and expenditure. It is estimated that net financing of government bonds in October will be approximately 200 billion yuan, while fiscal revenue and expenditure are expected to reach around 600 billion yuan. Additionally, changes in foreign exchange outstanding have had a relatively weak impact recently. Overall, the agency estimates a liquidity gap of approximately 700 billion yuan in October. Despite these challenges, they expect the central bank’s neutral to loose tone in monetary policy to continue, and overnight and 7-day interest rates to return to reasonable levels.
The Guotai Junan fixed income research team predicts that the phased easing window may open in October. The end of September saw significant fiscal expenditure, which has historically been favorable for liquidity in the following month. Additionally, the progress of special bond issuance is on track, indicating that the allocation of special bonds will contribute to the liquidity environment in October.
Looking ahead to the fourth quarter, the fixed income team of Zhongtai Securities suggests that factors causing disturbance in funding may be alleviated. This includes a recent pickup in the bond market leverage ratio, the expected halt in US interest rate hikes, and the impact of credit impulse on the improvement of credit data in August. However, the team notes that credit improvement in the following months remains to be seen.
Overall, the funding situation in October will face constraints from internal and external balance. However, with measures in place to actively protect funds and the potential easing of pressure on the RMB exchange rate, the overall funding aspect is not expected to further tighten.